Good morning and welcome to yesterday’s delayed newsletter.
Galp's decision to take Mozambique to international arbitration over the taxation of its sale of a stake in the Rovuma Basin is on its face a technical dispute over competing tax calculations. But it is shaping up to become an important test of how effectively Mozambique can enforce its right to tax the enormous gains generated by transactions involving the country's natural resources.
The dispute concerns Galp's sale of its 10% interest in Area 4 to XRG, the international investment arm of Abu Dhabi's ADNOC. The transaction is worth up to $1.38bn, with Galp receiving $881m on completion, a further $100m after the final investment decision on Coral Norte, and another $400m if Rovuma LNG reaches FID.
The disagreement is not over Mozambique's capital gains tax (CGT) rate, but on how the taxable gain should be calculated — that is, how much should be deducted from the sale price before tax is applied.
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Mozambique's Tax Authority argues that Galp realised a capital gain of around $1bn and has demanded $176m in tax, since CGT — at 32% — is only levied on 55% of the capital gain for oil and gas assets held for more than five years. Galp says its taxable gain was only a small fraction of that amount, and that the tax due was settled as part of the transaction. The difference stems from the two sides' radically different views of the deductible cost base, although neither has publicly explained in detail which costs account for the gap.
Four Maputo lawyers with experience of major extractive-sector tax disputes, consulted by Zitamar, all believe the Tax Authority has the stronger legal position. They argue that Mozambique's legislation is intended to tax the increase in value between acquiring and disposing of an asset, and that companies cannot simply expand the deductible cost base in ways not envisaged by the law. If that interpretation prevails, the Tax Authority's assessment is likely to stand.
